How to Calculate Net Income Growth

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Most people are familiar with the trendy, hot, new restaurant that closes just a few months after it opens. Having a reservation waitlist and a high-end menu is no guarantee that a restaurant will turn a profit. This is true for any type of small business. As many frustrated business owners have found out, it's possible to increase sales month-after-month while still losing money. The key to a successful business is not in how much money you make, but how much of it you keep. And the only way to know for sure is to pay attention to the numbers. Without a steady net income growth, there is no way to keep a business open for any length of time.

To calculate net income growth, subtract the previous period's net profit from the current period's net profit and divide the result by the last period's figure. Multiply by 100 to get a percentage growth rate between the two periods.

Understanding Net Income Growth

It's often said, that in the business world if you're standing still you're falling behind. Businesses need to make more profit each year than they did the previous one. When you take into account the increase in the cost of living and the need for savings and possible future expansion, last year's profit can add up to a loss in today's economy. You have a wide variety of methods for increasing your bottom line, from cost-cutting to marketing, but you have to know where you are before you can plan where you want to go. Is your business growing at a satisfactory rate? You can only know this by looking at your net income growth from quarter-to-quarter or from year-to-year.

How To Calculate Net Income Growth

Calculate your business's net income growth by subtracting the last period's net profit from the current period's net profit. You can use this year versus last year, this quarter versus last quarter or this quarter versus the previous year's comparable quarter. Just make sure you're comparing apples to apples. For example, it would not be useful to compare a quarter in low-season to a quarter in high-season. Take the difference and divide it by the net profit from the last period, then multiply that number by 100. This will give you a percentage growth rate between the two periods of time.

Example of Net Income Growth Calculation

Here's an example. Suppose your business posted a net profit of \$300,000 last year and a net profit of \$360,000 this year. The difference between the two years is \$60,000. Divide this by last year's net profit, \$300,000, and you get 0.2. Multiply this by 100 and you'll find a strong 20 percent net income growth over last year.